Fiscal policy should play a more active and important role in stabilizing growth and stimulating domestic demand

China's macroeconomic conditions deteriorated in April, with the growth momentum of its consumption, investment and exports simultaneously weakened.

Retail sales growth of the country's consumer goods declined to 14.1 percent year-on-year from 15.2 percent in March and the accumulated fixed asset investment fell from 20.9 percent to 20.2 percent, with real estate investment dropping from 23.5 percent to 18.7 percent. The growth rate of exports further declined to 4.9 percent from 8.9 percent in the previous month. Such a momentum, if it continues, will likely drag gross domestic product growth down to 7.8 percent in the second quarter from an 8.1 percent in the first quarter.

Weakened demand was also reflected in the tumbling consumer price index. In April, China's CPI declined to 3.4 percent year-on-year from 3.6 percent in March and the producer price index declined to minus 0.7 percent from minus 0.3 percent. And as a result of the decline of enterprises' financing demand, the country's newly increased loans fell drastically to 681.8 billion yuan ($107 billion) in April from more than $1 trillion yuan in the previous month. The growth of its industrial added value also declined to 9.3 percent from 11.9 percent during the same period.

The biggest risk facing China's economy stems from the turmoil in the eurozone. If Syriza, a radical leftist coalition in Greece that is opposed to international assistance and fiscal austerity, wins in the mid-June elections and if the European Union, European Central Bank and the International Monetary Fund decline to make concessions on austerity, Greece is likely to default on its debts and exit the eurozone. This would not only deal a heavy blow to its economy and debt holders but also ferment market misgivings toward the economic prospects of Portugal, Ireland, Spain and Italy and worsen Europe's debt crisis. Drastic global financial fluctuations will plunge the eurozone into a further recession and strangle the nascent economic recovery in the United States.

Fluctuations in the global market and the decline of economic growth in developed countries will have multiple negative effects on China's economy. The dwindling of external demand will hit China's exports and a protracted economic recession will increase the possibility of developed countries embracing trade protectionism, which will fuel trade frictions with China.

Faced with the deteriorating international economic environment and the continuing decline of domestic demand, the Chinese government has changed its established macroeconomic tone. During a recent inspection tour of Wuhan, capital of Hubei province, Premier Wen Jiabao demanded that the priority be stabilizing growth. At a State Council meeting on Wednesday, the government once again pointed out that the country will carry out well-timed and targeted adjustments in a bid to expand domestic demand, a message interpreted as the signal for a loose macroeconomic policy.

From a monetary perspective, China's central bank is expected to continue to cut the reserve requirement ratio for banks. On May 12, the central bank announced a 50-basis-point cut in banks' reserve requirements, the third cut since December. More cuts are expected in the months ahead. Despite the slim possibility of the current benchmark interest rates for deposits being lowered, there is an increased likelihood of asymmetrical interest rate hikes for deposits and loans in the future.

However, a loose monetary policy alone will not be enough to spur economic growth. At a time when domestic currency supply remains at a high level and China is suffering from negative interest rates, a continuous large-scale relaxed monetary policy, especially the input of huge credit into the market, will have enormous costs for the economy and society. While trying to pursue economic growth, the country's fiscal policy should play a more active and more important role in the latest round of macroeconomic regulation.

As part of its efforts to spur the slowed economy, the government should expand tax reductions in a bid to further lighten tax burdens on small and medium-sized enterprises. At the same time, the threshold for individual income tax should be further raised.

Measures should also be taken to increase the construction of government-subsidized affordable housing and include this into the performance assessment system for local officials. Besides, more spending should be shifted to education, healthcare, social security and other public services. Increased government inputs in these fields will help reduce residents' sense of uncertainty, reduce their inclination to save and encourage them to spend more, all of which will help China develop a consumption-driven economy.

At the same time, China should also accelerate its ongoing financial reforms and lower the thresholds for the access of non-governmental capital to railways, telecommunications, education and healthcare.

In particular, the country should not suspend its regulations to cool the real estate market because of its increased efforts to maintain economic growth. Otherwise, house prices, which have seen a moderate decline, will rebound negating the hard-won regulatory results of the previous year.

The author is a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences.